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March 31, 2022

Biodiversity catching up to climate as EU advisers outline details on taxonomy

The publication of technical guidance on the EU green taxonomy has added impetus to the growing weight of measures ensuring that investors and corporates adequately consider the impact of their decisions on biodiversity.

The EU’s Platform on Sustainable Finance published a report on how the taxonomy can be expanded to include intermediate activities that would help transition to a greener economy on March 28, highlighting the need to avoid significant harm to biodiversity as well as other environmental objects.

Two days later, on March 30, the platform then released a separate report with the technical screening criteria on how to evaluate companies’ impact on biodiversity, as well as contributions to the transition to a circular economy, pollution prevention, and sustainable use of water and marine resources.

The biodiversity criteria target the overall goal of ensuring “that by 2050 all of the world’s ecosystems and their services are restored to a good ecological condition, resilient, and adequately protected” – the equivalent of the climate criteria’s alignment with the Paris Agreement pledges to limit carbon emissions and global warming.

The EU Commission is expected to review the platform’s report and its recommendations, making its own proposals for a delegated act near the end of this year, according to platform chair Nathan Fabian.

“In launching our report, we’re providing more opportunities for new sectors of the economy to demonstrate that they are substantially contributing and doing no significant harm to Europe’s sustainability objectives,” said Fabian at the report’s launch.

The biodiversity criteria apply to sectors such as food and agriculture, construction, transport and some forms of power generation. Mining will also be subject to biodiversity criteria for inclusion in the taxonomy, but the platform has not yet completed its work on this complex sector.

Biodiversity poses technical challenges

As with other elements of the taxonomy, companies have three possible routes to demonstrating their significant contribution to protection and restoration of biodiversity; by reducing pressures on the environment, by improving its state, or by enabling either of these to happen.

“We started with quite a bottom-up approach to think about the activities and how they impact on the environment, and vice versa. For animal production for example, we talk about the impacts of land conversion; and the crop, soil, nutrient, water, waste and energy management practices and land use inherent in the feed, manure and housing system,” said Anna Creed, associate director of thought leadership at the Climate Bonds Initiative and lead on the platform’s land-based work.

“Climate change at least has the single goal of greenhouse gas emission reduction, but when you’re talking about biodiversity and ecosystems there’s many parts of that that you want to tackle simultaneously,” she said, explaining that the platform faced a challenge both in setting criteria, quantifying a substantial contribution, and making the end product usable for industry and investors.

The proposed extension of the taxonomy sees the pressure on investors and companies to take action on biodiversity issues continue to grow.

The Network for Greening the Financial System and INSPIRE argued that biodiversity loss poses similar systemic financial risks to climate change in a recent report. The proposed Taskforce for Nature-related Financial Disclosures sets out the baseline concepts market participants should use when assessing nature-related risks and opportunities.

At a country level, Malaysia’s central bank shone a light on the exposure of the country’s financial institutions to sectors at grave risk from biodiversity loss in a report published in March 2022. In 2021, the Dasgupta review for the UK government urged recognition that “economies are embedded within nature, not external to it”, while the UK Sustainable Investment and Finance Association has urged policymakers to use the upcoming UN biodiversity conference (COP 15) in Kunming to commit to reversing biodiversity loss by 2030.

Acceleration in investor action

This impetus is vitally important, according to Citi Research’s managing director and head of EMEA ESG research Anita McBain, with the financial community’s progress on environmental issues having so far focused on climate change.

“This is a twin crisis…climate change and biodiversity are the two sides of the same coin,” she says. Tropical deforestation is responsible for the equivalent of 8 per cent of global emissions according to Global Forest Watch, more than the entire EU.

While regulations and frameworks such as the green taxonomy and TNFD are not as developed as those for addressing climate change, McBain says poor data can no longer credibly be held to blame, and says that those at the vanguard are beginning to make progress.

“We are also witnessing in real time an escalation within the investor community and the corporate community. Investors are now asking tough questions on the financial materiality of biodiversity loss,” she says.

Investors may start by asking companies whether they have a biodiversity policy, or whether this is considered at board level if the company is exposed to risk from extreme events like pollination loss, according to McBain. Solutions and opportunities are also increasing, she says, with research progressing on subjects like crop management and alternative proteins.

Greater conformity on corporate disclosure regimes will allow better analysis of whether poor biodiversity practices are translating into financial performance, but McBain says the signs are already there: “We performed some analysis using Truvalue Labs data and we found a very high correlation between ecological impact and poor supply chain management.”

A service from the Financial Times